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Are Digital Mobile Lenders the New Loan Sharks?

There are 14 million people blacklisted by Credit Reference Bureaus (CRBs) in Kenya according to the latest figures. This indicates a 45% jump between August 2020 and January 2021. This can been largely attributed to the proliferation of digital mobile lenders. A 2019 FinAccess report shows mobile bank loans and digital app loans with the second and the fourth highest default rate by loan type respectively. This has led to many people accusing digital app lenders of loan shark tendencies. They also deliberately lending to people who can’t afford to pay back due to the high interest rates. This is by use of alternative data such as MPESA transaction history. Also access to a borrower’s contacts can give them leverage in nudging borrowers to repay loans in default.

One of the reasons that reinforces the claim that digital mobile lenders operate a debt-trap business model is that they loan a lot of money to the unbanked and underbanked.  This can be shown in the significant growth in the number of borrowers who can access quick unsecured loans. This can be through their mobile phones easily with no previous credit repayment history. On the flipside, according to Internet World Stats (IWS), Kenya recorded the highest internet infiltration rate in Africa in the year 2020. According to IWS, 87.2% of the country’s population have been connected to the internet. This can present a huge market to provide the unbanked and underbanked with financial services through the internet.This can range from providing loans and financial literacy through the new pervasive medium, a demographic that had largely been neglected.

Digital lenders can be seen to be operating with opaque lending practices that does not foster transparency before lending to borrowers. This can be reflected in the punitive late payment fees that borrowers are saddled with. These fees end up crippling the financial health of a borrower. This can leave them in a negative-pay cycle, borrowing to repay loans due. Also, when pressed on this issue, they point out to their terms of service that every borrower must agree to before they access the financial services offered. From their assertion, it is the prerogative of the prospective borrower to assess the terms of the service before agreeing and then decrying when they are enforced.

Digital lenders posit that they don’t just loan to borrowers with debt distress. They invest in technology that utilizes alternative data. The data can be provided by the prospective borrower to paint a borrower’s ability to pay a loan. The limit can be determined by the credit scoring engines that heavily rely on data science and machine learning. This can enable digital mobile lenders to provide a service that was previously not available to the unbanked and underbanked.

Last year the Central Bank of Kenya (CBK) revoked the approval of digital lenders to share their data with CRBs. Also it exempted those borrowing less than Ksh 1,000. This can be seen as trying to tame the runaway defaulting. In addition, members of parliament cleared a Bill that seeks to regulate mobile loan rates. With that, it paves the way for a regulatory framework for digital mobile lenders. Moreover, a wider adoption of financial services by the population to take advantage of the fourth industrial revolution.

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